Boom Going Bust?

The Chippewa Valley Ethanol Company gasification plant is pictured here, June 26, 2008. General manager Bill Lee intends to gasify corncobs to help to power his Benson, Minnesota ethanol plant. Right now they gasify wood chips to supplement the expensive natural gas now used in the process. MCT

The Chippewa Valley Ethanol Company gasification plant is pictured here, June 26, 2008. General manager Bill Lee intends to gasify corncobs to help to power his Benson, Minnesota ethanol plant. Right now they gasify wood chips to supplement the expensive natural gas now used in the process. MCT

CHAMPAIGN, Ill. -- Not long ago, the fledgling ethanol industry was the darling of investors, farmers, the federal government and a lot of Americans who liked the idea of turning corn into fuel.

But suddenly, it doesn't have nearly as many friends.

Rising worldwide food prices and shortages have spurred calls in Congress to roll back the federal requirement that increases the amount of ethanol and other biofuels blended with the nation's gasoline supply.

Critics say so much corn is being used for ethanol that there's less available for people and animals to eat, raising prices of everything from tortillas to meat.

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What's more, investors who bought into the industry in good times aren't seeing the returns they'd hoped for as once-record profits began to fall.

"Consumers are starting to get restless and Washington is starting to listen," said Morningstar analyst Ann Gilpin, who follows Decatur, Ill.-based Archer Daniels Midland, the country's second-largest ethanol producer.

Stanislaus County's first plant, under construction by Cilion Inc. along Highway 99 in Keyes, will be completed sometime in the fourth quarter of this year, spokeswoman Karri Hammerstrom said.

The ethanol market would be severely limited if Congress rolled back the federal mandate that calls for annual increases in the amount of biofuels added to the fuel supply -- 9 billion gallons by the end of this year, increasing to 36 billion gallons by 2022.

That would most hurt companies that rely exclusively or primarily on ethanol, which include a mix of small, often locally owned distillers, already under pressure since ethanol prices fell and corn prices rose sharply, as well as larger publicly traded firms such as VeraSun Energy Corp., the country's top ethanol producer.

"If you sell one product and the only reason there's a market for it is because the government makes a law requiring consumption -- if that law goes away, obviously you're in trouble," Gilpin said.

The odds of Congress changing that mandate this year are slim because the 10 states, mostly in the Midwest, that produce more than 80 percent of all American ethanol have between them almost half the 270 electoral votes needed to win a presidential election, said analyst Kevin Book of Friedman, Billings, Ramsey & Co.

After the election, though, sentiment could change.

"I think we're still a long ways from anything actually being done on it, but at the same time there is a lot more serious support than there was at this time two or three years ago," said Rick Kment, an ethanol industry analyst for agricultural data company DTN.

Congress already was willing to take a modest swipe at ethanol when it approved a farm bill with a provision that would shave a tax credit for refiners that blend ethanol into their gasoline from 51 cents to 45 cents.

Investor disappointment also is weighing on ethanol-only companies, particularly those that are smaller and privately held, Kment said.

He said much of the public and private investment was made when profits were at record levels -- $2 a gallon in some cases, meaning even a very small plant that distilled half a million gallons a year would clear $1 million.

"It is very unlikely we will see that kind of profit again," Kment said.

Shares of Brookings, S.D.-based VeraSun have fallen more than 15 percent since April 1. Pacific Ethanol, another major biofuels maker, has seen its stock drop by about 30 percent in the same period.

After VeraSun announced a first-quarter profit that fell short of investor expectations, some analysts raised worries about the pressures facing the industry.

"We remain cautious on the entire sector as we expect sustained higher corn and natural gas prices with little relief in sight," Calyon Securities' George Kotzias wrote in a note to investors. He said he was reviewing his earlier estimates of VeraSun's expected performance, while at least one other analyst downgraded his expectations.

VeraSun officials did not return a call seeking comment.

On the other hand, analysts say ethanol producers such as ADM that distill the fuel additive as just one of many businesses appear better prepared to weather whatever's coming their way.

ADM doesn't break out the profit it makes from ethanol, but the division that includes the fuel additive operations accounted for about 20 percent of the company's earnings last year.

But Chief Executive Patricia Woertz said retreating from biofuels would be a mistake.

Ethanol is selling for more than it did last year, but at 60 cents to 70 cents a gallon less than wholesale gasoline, is still cheap enough to make it an attractive option for refiners looking to make their oil go further, Kment said. And demand is steady.

Many analysts say the pressure on the industry would ease with a drop in food prices, and ADM agrees.

"I think globally it'd be very good to have a large corn crop and a large oilseed crop," ADM Executive Vice President John Rice said at a conference in New York last week. "I think it would eliminate some of this debate, the food versus fuel."

Ethanol companies have gone on a public relations campaign, touting studies that raise doubts about the degree to which ethanol is affecting global food prices, advertising locally in newspapers and on radio in Washington and parts of the Midwest. The industry also argues that drivers buying gasoline blended with a small amount of ethanol -- a common product at gas stations -- are paying less than they otherwise would.

"Consumers today who are filling up with the blended fuel are saving somewhere around a dime (a gallon)," said Matt Hartwig, a spokesman for the Renewable Fuels Association, an industry lobbying group.

But that's a tough sell to drivers given what they are paying at the pump these days, Gilpin said.

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